How to Start a Business in Finland II – Permanent Establishment

Wishing to start a business in Finland, it is beneficial and even necessary to understand the main tax obligations. While the principles of value-added taxation are quite similar in both Estonia and Finland, unlike Estonia, Finland imposes corporate income tax on profits generated from business activities.

For companies operating in both Finland and Estonia, circumstances regarding both taxes may initially appear somewhat confusing. It is crucial to understand which category the company falls into, as taxation can be based on three principles: tax liability remains in Estonia, tax liability arises in Finland but is limited or partial, or the company incurs a general tax liability in Finland.

As in other countries, in Finland, the basis for the emergence of income and value-added tax obligations is whether the company has a permanent establishment in Finland. Wanting to start a business in Finland, it is essential to be aware of a significant distinction – a permanent establishment is defined differently in the Finnish Value Added Tax Act and the Corporate Income Tax Act.

In this article, we outline the principles used in determining a permanent establishment, separately examining income tax and value-added tax obligations. The nature of tax obligations is discussed in an article focusing on the substantive aspects of income and value-added taxes in the series 'How to Start a Business in Finland III – Income and Value-Added Taxes.'

Permanent Establishment in the Sense of the Finnish Income Tax Act

A permanent establishment in the sense of the Finnish Income Tax Act arises in Finland under the following circumstances:

1. Management or administration is located in Finland, meaning the actual place of management of the company is in Finland. This includes situations where the company is managed from Finland by Finnish tax residents.
2. The company has a representative in Finland. A representative is an individual authorized to enter into contracts and place orders on behalf of the company. The existence of a representative is also assumed if the company has a rented office in Finland or another permanent place where the company's activities take place. The rental of equipment used for providing services in Finland can also be a basis for the establishment of a permanent establishment.
3. In the construction and/or installation sector, if the duration of the project exceeds 6 months.

A permanent establishment in the sense of the Income Tax Act does not arise in Finland under the following circumstances:

1. The representative performs supportive activities such as preliminary work or marketing.
2. If premises in Finland are rented solely for the storage, presentation, or transfer of the company's goods, no permanent establishment is created. However, each such case is examined individually by the tax authorities, and a separate decision is made.
3. In the case of construction or installation activities, if the project duration is less than 6 months.
4. The company has a warehouse in Finland, and sales from this warehouse are solely for export to Sweden, and no domestic sales are conducted from this warehouse.
5. Real estate sales or rental in Finland is not a basis for the establishment of a permanent establishment, but it is important to note that income related to real estate is subject to income tax.

Permanent establishment in the sense of the Finnish Value Added Tax Act

The obligation for a company to register for VAT and start paying VAT in Finland arises under the following conditions:

• The company has a permanent business presence in Finland. This includes, for example, offices, production facilities, etc., used for business activities in Finland.
• Engaging in construction or installation activities, if the duration of a single project or consecutive projects exceeds 9 months.
• Having a warehouse (including a temporary warehouse) located in Finland triggers the obligation to register as a VAT taxpayer.

If a company establishes a permanent establishment in Finland, it may not necessarily result in an immediate obligation to register as a VAT taxpayer. Similarly, the emergence of VAT liability does not automatically imply the creation of a permanent establishment.

A permanent establishment may not arise, for example, in the context of the VAT Act, when a company sells goods or services to individuals in Finland. However, in such cases, the company still needs to register as a VAT taxpayer.

If an Estonian company does not have a permanent establishment in Finland but sells its products to a Finnish individual, a case of mixed tax accounting may arise. For example, if an Estonian company sells a garden house to a Finnish individual along with its installation, Estonian VAT applies to the garden house, but for the installation service, which takes place in Finland, Finnish VAT rules should be considered. Such situations require individual analysis to avoid unnecessary tax risks due to mistakes.

The emergence of the audit obligation based on a permanent establishment

The audit obligation arises for a foreign company in Finland based on a permanent establishment. Companies with a permanent establishment in Finland are exempt from auditing if only one of the following conditions is fulfilled:

• Sales revenue of 200,000 euros.
• Balance sheet volume of 100,000 euros.
• Number of employees, three or more people.

If two out of three or all three conditions are met, auditing is mandatory. If the company does not have a permanent establishment in Finland, then the obligation for auditing does not arise even if these conditions are fulfilled.

Read also other articles from the series 'How to start a business in Finland'

In this article, we discussed the concept of a permanent establishment to provide an overview of the principles applied to the taxation of income and value-added tax for Estonian companies operating in Finland. Information about the principles and nature of Finnish income and value-added tax can be found in the article 'How to start a business in Finland III - income and value-added tax'. In the first article of the series, we focused on the topic of business entity forms: 'How to start a business in Finland I - business entity form'.